I drill a line of holes the same depth as the length of the tang, then clear out the space in between with an end mill. You can do it with a drill bit if you take it slow and don't put too much pressure on the bit. One of those spiral cutting bits for the Rotozip type tools might work well.
Since you are using wood, once you get the hole close to the right size, you can heat up the tang of your blade and burn it into the handle. I have used this technique a few times, and I'm amazed by how easy the tang burns in. You get a really tight fit unless you things too much. Be aware that you sometimes have flames shooting out, especially if you have a through tang.
When burning in the tang, I prefer to put the blade in a vice and hold the piece of wood. It just seems safer to me to not be holding the hot part. Also, the metal vise acts as a heat sink and helps to keep from ruining the temper on the blade. As soon as I get the handle burned in I pull it off (otherwise it can get stuck) then submerge the blade in a bucket of water.
If you are interested in burning the tang in but don't want to screw up you nice piece of wood, you could always practice on a scape piece of hardwood first.